What is the SEIS?
The SEIS is a scheme introduced by the government in 2012/13 following the success of – and to complement – the EIS.
In this case the idea is to help smaller and probably younger businesses raise funds and grow. As with EIS when you invest in an SEIS-qualifying company you get very good tax breaks.
However, there are important differences. You get a greater income tax break with SEIS than with EIS. And capital gains are not deferred: you can actually halve the capital gains tax you owe.
To qualify for the SEIS a firm must be small and unquoted, have traded for a maximum of 2 years, have gross assets of less than £200,000 and less than 25 employees at the time of investment.
What kind of companies qualify for the SEIS?
SEIS-qualifying companies vary greatly: from asset backed, to higher risk early stage.
As with EIS, the rules are fairly specific, but essentially to qualify a company needs to carry a trade with the view to making a profit. Some companies and sectors are excluded, including those dealing in land, commodities or shares.
Although the list of exclusions is quite long, it does leave you huge scope for investment. Over the past few years app development, music and film production companies have been popular investments.
Single company or portfolio?
The first decision you face is whether to invest in a single company or a managed portfolio. As you would expect, the single company option is far more risky because your investment’s success depends solely on how well one small, very young company.
Conversely managed portfolios tend to offer a greater spread of risk, as they invest in a number of companies, often in different sectors and with different characteristics.
Deciding between a single company and a managed portfolio is rather like deciding between individual shares and a unit trust. There is an important difference, though. You have no problems researching a firm like Vodafone. Plenty of information and commentary is available. And selling those shares is very easy.
You cannot say that for investments in SEIS-qualifying companies. The information is scarce and not easy to find. Moreover, the exit has to be carefully planned – there is no established route. A good fund manager takes care of these matters: they select and carry out due diligence and design a strategy for exiting the investment.
As you would expect, such expertise has to be paid for, so it’s typically more expensive to invest in a managed portfolio than in a single company.
Nevertheless we believe there are managers who more than earn their fees.
What are the tax breaks?
There is a mix of upfront and ongoing tax reliefs:
- Up to 50% income tax relief
- Tax-free growth
- Up to 50% Capital Gains reinvestment relief
- Inheritance tax relief
- Loss relief on exit
Please remember: tax rules can change and benefits depend on your circumstances. SEIS tax benefits are only available if company maintains its SEIS status.
How much can I invest?
The maximum amount you can invest is £100,000 per tax year. A ‘carry back’ facility is also available.
What returns can SEIS investments offer?
As you might imagine , investing in SEIS-qualifying companies is a case of very high risk/high potential reward.
Any returns will be mostly in the form of capital growth, rather than dividends.
You won’t be surprised that smaller companies are more likely to fail than their larger counterparts. But there is a bright side. If your investment doesn’t pan out the government effectively caps losses at 27.5% (or 13.5% if you are also reducing a capital gains tax liability) for additional rate-taxpayers through loss relief. In other words, the tax benefits provide a buffer: they mitigate the impact of losses and amplify the impact of gains.
What are the charges?
The charges vary depending on the type of investment and whether it is an SEIS managed portfolio or a single SEIS company. Within a managed portfolio, there will be annual management charges paid to the underlying manager as well as initial fees and often performance-related fees. With an individual company SEIS, there may be an initial fee, however there may not be explicit annual management fees as essentially the cost of running the company is the cost of doing business.
Why consider SEIS investments?
In the first three years since its introduction thousands of people have already invested more than £424 million in over 5,445 SEIS-qualifying companies.
However, SEIS investments are still a niche product, only suitable for some investors as part of a diversified portfolio.
They could be particularly attractive if you’re looking to save income and capital gains tax – whilst investing for growth.
Let’s assume you have a gain of £100,000 (over your tax-free allowance) and income tax liability of £50,000. If you did nothing, you would face a £20,000 capital gains tax bill and a £50,000 income tax bill.
If you invested £100,000 in SEIS you could erase your £50,000 income tax bill. In addition, your capital gains tax could be halved – you would only have to pay £10,000, assuming the gain is subject to the new reduced 20% rate. That is a total tax saving of £60,000 on a £100,000 investment.
How can you buy SEIS investments?
There are many SEIS – individual companies and portfolios. They work much the same way as EIS. They are not traded on the stock market but you can invest through a specialist broker, such as Wealth Club.
SEIS offers are often available all year round, but each offer may only be open for a specified period. However, if the fund raising target is hit before the official deadline, as is often the case with the most popular SEIS, the offer closes.
What if you want to sell your SEIS investment?
As SEIS are not traded on the stock market, you cannot sell the investment the way you would sell a share. Instead, it is the managers’ responsibility to design an exit strategy that allows them to return capital and any growth to investors.
The manager will usually give an indication of their targeted exit strategy and time frame (typically four years) at the onset. Common exit strategies include management buy-outs, trade sales or refinancing.
Please note, SEIS are long-term investments. The minimum holding period to retain the income tax relief is three years.
What are the key risks?
As with all investments, the value and income can fall as well as rise so you may get back less than you invest.
But because they invest in small companies, this risk is much greater with the SEIS than with other stock market investments. Small companies are more volatile and more likely to fail than their larger counterparts.
For this reason, SEIS investments are long-term investments and are not for everyone. They are for high net worth or sophisticated investors who have no need for immediate liquidity and are able to withstand a potential total loss.
In addition, as there is no recognised market for these shares, SEIS investments are less liquid than other stock market investments. They will be harder to sell.
Lastly, to retain the full tax benefits, you must hold the investment for a minimum period of three years and the companies must retain their qualifying status. Otherwise, you may have to pay back the income tax relief you have received.
Please remember, all the tax and products rules mentioned here are those currently applying but could change in future.